In re Abc Learning Centres Ltd. N/K/A Zyx Learning Centres Ltd. & A.B.C. Usa Holdings Pty Ltd.

• Decision Date: 21 January 2011
• Docket Number: No. 10–11711 (KG).,10–11711 (KG).
• Citation: 445 B.R. 318
• Court: U.S. Bankruptcy Court — District of Delaware
• Parties: In re ABC LEARNING CENTRES LIMITED n/k/a ZYX Learning Centres Limited & A.B.C. USA Holdings Pty Limited, Debtors in Foreign Proceedings.

445 B.R. 318

In re ABC LEARNING CENTRES LIMITED n/k/a ZYX Learning Centres Limited & A.B.C. USA Holdings Pty Limited, Debtors in Foreign Proceedings.

No. 10–11711 (KG).

United States Bankruptcy Court, D. Delaware.

Nov. 16, 2010.Order Granting Reconsideration in Part Jan. 21, 2011.

Young Conaway Stargatt & Taylor, LLP, Joel A. Waite, Esquire, Ryan M. Bartley, Esquire, Wilmington, DE, Chadbourne & Parke, LLP, Howard Seife, Esquire, Andrew Rosenblatt, Esquire, New York, NY, for ABC Learning Centres Ltd. & A.B.C. USA Holdings Pty Ltd.Morris, Nichols, Arsht & Tunnell, LLP, Robert J. Dehney, Esquire, Gregory W. Werkheiser, Esquire, Matthew B. Harvey, Esquire, Wilmington, DE, Baird, Williams, & Greer, LLP, Daryl M. Williams, Esquire, Michael C. Blair, Esquire, Phoenix, AR, for RCS Capital Development, LLC.

OPINION ON DEBTORS' PETITION FOR RECOGNITION & RCS CAPITAL DEVELOPMENT, LLC'S MOTION FOR RELIEF FROM STAY

KEVIN GROSS, Bankruptcy Judge.

I. INTRODUCTION

The Court has before it two matters: Debtors' petition seeking recognition of certain insolvency-related legal proceedings in Australia under Chapter 15 of Title 11 of the U.S.Code, 11 U.S.C. §§ 101–1532 (the “Bankruptcy Code”) and a motion for relief from stay filed by RCS Capital Development, LLC.

On May 26, 2010, Debtors filed petitions seeking recognition pursuant to §§ 1515 and 1517 of the Bankruptcy Code ¹ of voluntary administration proceedings (the “Voluntary Administration Proceedings”) then ongoing in Australia pursuant to Australia's Corporations Act of 2001(Cth) (the “Corporations Act”), of ABC Learning Centres Limited, n/k/a ZYX Learning Centres Ltd. (“ABC Learning”), and its wholly owned subsidiary A.B.C. USA Holdings Pty. Limited (“ABC Holdings” and, collectively, the “Debtors”) (the “Petitions,” D.I. 1) ². Subsequent to the filing of the Petitions, Debtors' creditors converted the Voluntary Administrations to liquidations (the “Liquidation Proceedings”), as provided for by the Corporations Act. Debtors' provided proper notice to this Court of their entry into liquidation and the Court now considers their Petitions as requests for recognition of the ongoing Liquidation Proceedings.

Debtors seek recognition of the Liquidation Proceedings under § 1517 as “foreign main proceedings,” as defined by § 1502(4), or, in the alternative, as “foreign nonmain proceedings,” as defined by § 1502(5). This Court's recognition of the Liquidation Proceedings as foreign main proceedings would entitle Debtors to certain protections of the Bankruptcy Code, including the automatic stay provided for by § 362. Recognition of the Liquidation Proceedings as foreign nonmain proceedings would not trigger an automatic stay, but would permit the Court to impose one, which Debtors have requested. ³

RCS Capital Development, LLC (“RCS”), an Arizona limited liability company, objects to the Petition (the “RCS Obj.,” D.I. 57). RCS asserts that the Liquidation Proceedings are not “foreign proceedings” recognizable under Chapter 15 of the Bankruptcy Code because they do not meet the threshold factors set forth in § 101(23). Specifically, RCS argues that the Liquidation Proceedings are not collective in nature and are not supervised by a foreign court. In addition, RCS argues that the Court deny recognition of the Liquidation Proceedings as violative of U.S. public policy, pursuant to § 1506.

On May 14, 2010, RCS received a favorable jury verdict (the “Arizona Verdict”) against Debtor ABC Learning and its non-debtor subsidiary ABC Development Learning Centres (USA), a Delaware corporation (“ABC Delaware”) in certain litigation (the “Arizona Litigation”) in The Superior Court of the State of Arizona In and For the County of Maricopa (the “Arizona State Court”) (RCS Obj. at 3). Subsequently, Debtor ABC Learning and ABC Delaware filed a complaint against RCS, American Childcare Properties, Inc., and Kenneth Krynski alleging, in part, breach of contract, fraud, and unjust enrichment, which is currently pending in The District Court, Clark County, Nevada (the “Nevada State Court”) (the “Nevada Litigation”) (RCS Obj. at 3). RCS filed a motion in the instant case requesting modification of any stay the Debtors receive as a result of recognition of the Liquidation Proceedings to permit RCS to convert the Arizona Verdict into a judgment (the “Arizona Judgment”) and to assert a setoff based on the Arizona Judgment as a defense in the Nevada Litigation (the “Lift Stay Motion,” D.I. 85).

Upon consideration of the evidence presented, and for the reasons stated below, the Court grants Debtors' Petitions and recognizes the Liquidation Proceedings as foreign main proceedings. Furthermore, the Court grants RCS's Lift Stay Motion for the limited purposes of (1) allowing RCS to convert its verdict in the Arizona Litigation to a judgment and (2) preserving RCS's right to assert the Arizona Judgment as a setoff in the Nevada Litigation.

II. JURISDICTION

The Court has jurisdiction under 28 U.S.C. § 157(b)(1) and § 1334(b) and (d). Venue is proper in this Court under 28 U.S.C. § 1410. The Debtors' petition for recognition of a foreign proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(P); RCS's motion for relief from stay is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G).

III. FACTS

A. Debtors' Business Operations

Debtor ABC Learning is the parent company of thirty-eight subsidiaries (collectively, the “ABC Group”), including Debtor ABC Holdings and non-debtor ABC Delaware, ABC Learning's co-defendant and co-plaintiff in the litigation with RCS in Arizona and Nevada, respectively. Prior to the commencement of the Voluntary Administration Proceedings, ABC Group owned and operated child care centers primarily in Australia (approximately 1,045 centers), as well as in New Zealand, the United Kingdom, Canada, and the U.S.; “processed” approximately 100,000 child care transactions weekly; and employed approximately 15,000 full-time workers and a significant number of part-time and contractual employees. Declaration of Peter Walker (“Walker Decl.”) at 3. The ABC Group's business operations were funded, in part, by loans from eight banks (the “Bank Syndicate”). Id. These loans are secured by substantially all of the ABC Group's assets, with an outstanding balance as of May 2010, of approximately $1 billion.⁴ Id.

ABC Group conducted business in the U.S. through its direct interest in ABC Delaware and its indirect interest in Learning Care Group (US) Inc. (“LCG U.S.”). Walker Decl. at 4. ABC Delaware developed childcare centers in the U.S.:

[ABC Delaware] has no principal places of business or employees in the United States. The management and business decisions relating to [ABC Delaware] are made by ABC Group's management in Australia. [ABC Delaware], amongst other things, contracted with developers for the construction and development of childcare facilities located primarily in Florida, South Carolina, Nevada, Virginia, Arizona, Colorado and Georgia. Once developed, the contracts usually provided for [ABC Delaware] to purchase the childcare facilities....

(Walker Decl. at 4)

LCG U.S., through various subsidiaries, owns and operates child care centers throughout the United States. Id. It was acquired by the ABC Group in 2006 and subsequently sold a majority interest to a third-party corporation. Id. ABC Group currently holds a 40% minority interest in LCG U.S. through ABC Holdings. Id. Debtor ABC Learning, as the parent company of the ABC Group, wholly owns Debtor ABC Holdings. Both Debtors are incorporated in Australia and listed on the Australian Stock Exchange. Id. at 11.B. Australian Voluntary Administration Proceedings

On November 6, 2008, the boards of directors of Debtor ABC Learning and its thirty-eight subsidiaries resolved that the companies were likely to become insolvent and should enter voluntary administration, pursuant to the Corporations Act. Walker Decl. at 5. In conformity with these resolutions, the directors appointed Peter Walker and Greg Moloney as administrators for each of the entities (the “Administrators” and the “Petitioners”). Walker Decl. at 1 and 5; Transcript of August 9, 2010 hearing (“Tr. 8/9”) at 11 (Testimony of Greg Moloney); Petitioners' Exhibits 1–2. The commencement of the Voluntary Administration Proceedings stayed creditors from initiating or continuing collection actions. Walker Decl. at 5; Declaration of John Kenneth Martin (“Martin Decl.”) at 6–7; See Corporations Act, Part 5.3A, Div. 6.

The Corporations Act requires that companies in voluntary administration conduct two creditors' meetings. At the first meeting, creditors determine 1) whether a committee of creditors should be formed and 2) whether to remove the administrators appointed by the board of directors and appoint alternate administrators. Walker Decl. at 7. The first meeting in the instant cases was held on November 18, 2008, and the creditors elected to form a creditors committee and to continue with Messrs. Walker and Moloney as the Administrators. Tr. 8/9 at 11 (Moloney).

The Debtors and the other ABC Group entities were in Voluntary Administration at the time the Petitions were filed in this Court on May 25, 2010. The Voluntary Administrations continued until the second meeting of creditors on June 2, 2010.

C. Australian “Winding Up” Proceedings

At the second creditors' meeting for the ABC Group entities, held on June 2, 2010, the creditors resolved to “windup” (i.e., liquidate) the companies. ⁵ Tr. 8/9 at 23 (Moloney); Petitioners' Exhibits 3–6. The creditors appointed the Administrators, Peter Walker and George Moloney, as liquidators (the “Liquidators”) and commenced winding up proceedings (the “Liquidation Proceedings”). Petitioners' Exhibits 3–6. The creditors also created a “committee of inspection” comprised of nine (9) members representing a cross-section of creditors, including general unsecured creditors, the Bank Syndicate, bondholders, employees, and...